Premature deindustrialization: the new threat to global economic development

Premature deindustrialization: the new threat to global economic development

The economies of the United States and other rich countries — Japan, France, Canada, Switzerland — are often characterized as “post-industrial,” meaning they’re developed to the point that most of their citizens work in the service sector rather than in factory assembly lines. In the popular imagination, the old industrial landscape has moved abroad to Mexico or to China, perhaps due to bad trade policies or simply the vicissitudes of changing circumstance.

The good news is that the migration of factory work to much poorer countries has been a boon to those countries’ economic development, helping spur an unprecedented decline in global poverty.

And here’s where the news gets bad again.

Dani Rodrik, an economist at Harvard University who’s devoted his career to the interplay between globalization and economic development, recently documented a trend called “premature deindustrialization,” in which countries start to lose their manufacturing jobs without getting rich first.

“Developing countries,” he writes in an important paper published last year, “have experienced falling manufacturing shares in both employment and real value added, especially since the 1980s.”

Deindustrialization is especially severe in Latin America and Africa

Mexico is a case in point. As Americans are well aware, a number of large multinational firms have begun to locate manufacturing jobs south of the border to take advantage of Mexico’s combination of relatively low wages and relatively easy access to the US consumer market.

These jobs are a boon to Mexican workers because their wages — although lower than those of American factory workers — are much higher than what’s available to the typical Mexican. And these Mexican workers are almost as productive as their foreign competitors. That wage gap should drive rapid expansion of Mexican manufacturing, economy-wide increases in productivity, and overall higher living standards.

The truth, as reported in an important McKinsey study by Jaana Remes, is that economy-wide productivity growth in Mexico has been dismal. The reason is that the Mexican manufacturing sector has actually remained quite small.

“A modern fast-growing Mexico with globally competitive multinationals and cutting-edge manufacturing plants co-exists,” she writes, “with a far larger group of traditional Mexican enterprises that do not contribute to growth.”

The dynamic manufacturing sector, in other words, simply isn’t big enough to employ many people. And it’s not really growing much as a share of the Mexican economy. The report itself diagnoses this largely in terms of Mexico-specific factors, but the upshot of Rodrik’s research is that Mexico is fairly typical of the experience across Latin America, Africa, and the Middle East — and not totally unusual in Asia, either.

Structural change is moving in the wrong direction

In a separate paper, “Globalization, Structural Change, and Productivity Growth,” Rodrik and co-authors Margaret McMillan and Iñigo Verduzco-Gallo show a useful quantification of these trends. They group the world into four regions — the rich countries (labeled “HI” for high-income on the chart below), Asia, Latin America, and Africa — and then they break productivity growth down into two component elements.

On one hand, there’s productivity change within a given sector of the economy — health care, information technology, mining, etc. — and on the other hand there’s “structural” change, when workers move out of a low-productivity sector and into a high one.

Here’s what they found:


Though Africa and Latin America did not experience within-sector productivity growth that was as impressive as what happened in Asia, they did grow quite quickly by that metric — faster than the group of rich countries.

But while Asia bolstered its productivity growth through structural change, Latin America and Africa did the reverse. Workers shifted out of highly productive lines of work into small-scale shopkeeping and other low-productivity industries.

And even in Asia, positive structural change didn’t happen everywhere. Premature deindustralization has been witnessed in India, for example.

Manufacturing’s future is high-tech

One big cause of all this is China. Much as Americans may perceive China as the great devourer of manufacturing employment here, the truth is that manufacturing jobs as a share of all jobs in the United States has been shrinking since the end of World War II — long before China came on the scene as a competitor. It’s poor countries that have felt the new China impact and the trend toward deindustrialization.

And there’s a big difference between deindustrialization in rich and poor countries.

In the United States, for example, actual industrial production has risen sharply since 1990. Jobs are vanishing in part because the remaining workers — assisted by increasingly advanced machines — are growing more productive. This trend toward automation can be painful for workers in countries at any level of economic development, but it’s especially dire for the kind of developing nations that might have hoped manufacturing would help them get on the ladder to prosperity.

That’s because increasingly automated, increasingly sophisticated manufacturing enterprises will increasingly look more like software companies — where designing, programming, maintaining, and debugging the machines will be more important than staffing them. A country like the United States with a very robust high-tech sector will be a strong contender for those technologically intensive manufacturing jobs, even if there aren’t very many of them. Countries that haven’t yet industrialized, meanwhile, may be left out in the cold.

This story is part of The new new economy, a series on what the 21st century holds for how we live, travel, and work.


Premature deindustrialization: the new threat to global economic development

How to measure prosperity

How to measure prosperity

WHICH would you prefer to be: a medieval monarch or a modern office-worker? The king has armies of servants. He wears the finest silks and eats the richest foods. But he is also a martyr to toothache. He is prone to fatal infections. It takes him a week by carriage to travel between palaces. And he is tired of listening to the same jesters. Life as a 21st-century office drone looks more appealing once you think about modern dentistry, antibiotics, air travel, smartphones and YouTube.
The question is more than just a parlour game. It shows how tricky it is to compare living standards over time. Yet such comparisons are not just routinely made, but rely heavily on a single metric: gross domestic product (GDP). This one number has become shorthand for material well-being, even though it is a deeply flawed gauge of prosperity, and getting worse all the time (see article). That may in turn be distorting levels of anxiety in the rich world about everything from stagnant incomes to disappointing productivity growth.

Faulty speedometer

Defenders of GDP say that the statistic is not designed to do what is now asked of it. A creature of the 1930s slump and the exigencies of war in the 1940s, its original purpose was to measure the economy’s capacity to produce. Since then, GDP has become a lodestar for policies to set taxes, fix unemployment and manage inflation.

Yet it is often wildly inaccurate: Nigeria’s GDP was bumped up by 89% in 2014, after number-crunchers adjusted their methods. Guesswork prevails: the size of the paid-sex market in Britain is assumed to expand in line with the male population; charges at lap-dancing clubs are a proxy for prices. Revisions are common, and in big, rich countries, bar America, tend to be upwards. Since less attention is paid to revised figures, this adds to an often exaggerated impression that America is doing far better than Europe. It also means that policymakers take decisions based on faulty data.

If GDP is failing on its own terms, as a measurement of the value-added in an economy, its use as a welfare benchmark is even more dubious. That has always been so: the benefits of sanitation, better health care and the comforts of heating or air-conditioning meant that GDP growth almost certainly understated the true advance in living standards in the decades after the second world war. But at least the direction of travel was the same. GDP grew rapidly; so did quality of life. Now GDP is still growing (albeit more slowly), but living standards are thought to be stuck. Part of the problem is widening inequality: median household income in America, adjusted for inflation, has barely budged for 25 years. But increasingly, too, the things that people hold dear are not being captured by the main yardstick of value.

With a few exceptions, such as computers, what is produced and consumed is assumed to be of constant quality. That assumption worked well enough in an era of mass-produced, standardised goods. It is less reliable when a growing share of the economy consists of services. Firms compete for custom on the quality of output and how tailored it is to individual tastes. If restaurants serve fewer but more expensive meals, it pushes up inflation and lowers GDP, even if this reflects changes, such as fresher ingredients or fewer tables, that customers want. The services to consumers provided by Google and Facebook are free, so are excluded from GDP. When paid-for goods, such as maps and music recordings, become free digital services they too drop out of GDP. The convenience of online shopping and banking is a boon to consumers. But if it means less investment in buildings, it detracts from GDP.

Stop counting, start grading

Measuring prosperity better requires three changes. The easiest is to improve GDP as a gauge of production. Junking it altogether is no answer: GDP’s enduring appeal is that it offers, or seems to, a summary statistic that tells people how well an economy is doing. Instead, statisticians should improve how GDP data are collected and presented. To minimise revisions, they should rely more on tax records, internet searches and other troves of contemporaneous statistics, such as credit-card transactions, than on the standard surveys of businesses or consumers. Private firms are already showing the way—scraping vast quantities of prices from e-commerce sites to produce improved inflation data, for example.

Second, services-dominated rich countries should start to pioneer a new, broader annual measure, that would aim to capture production and living standards more accurately. This new metric—call it GDP-plus—would begin with a long-overdue conceptual change: the inclusion in GDP of unpaid work in the home, such as caring for relatives. GDP-plus would also measure changes in the quality of services by, for instance, recognising increased longevity in estimates of health care’s output. It would also take greater account of the benefits of brand-new products and of increased choice. And, ideally, it would be sliced up to reflect the actual spending patterns of people at the top, middle and bottom of the earnings scale: poorer people tend to spend more on goods than on Harvard tuition fees.

Although a big improvement on today’s measure, GDP-plus would still be an assessment of the flow of income. To provide a cross-check on a country’s prosperity, a third gauge would take stock, each decade, of its wealth. This balance-sheet would include government assets such as roads and parks as well as private wealth. Intangible capital—skills, brands, designs, scientific ideas and online networks—would all be valued. The ledger should also account for the depletion of capital: the wear-and-tear of machinery, the deterioration of roads and public spaces, and damage to the environment.

Building these benchmarks will demand a revolution in national statistical agencies as bold as the one that created GDP in the first place. Even then, since so much of what people value is a matter of judgment, no reckoning can be perfect. But the current measurement of prosperity is riddled with errors and omissions. Better to embrace a new approach than to ignore the progress that pervades modern life.


How to measure prosperity

What Slump? How Eurozone Growth is Bucking the Global Trend

What Slump? How Eurozone Growth is Bucking the Global Trend

Unusually, the eurozone is leading the way, strong first-quarter growth bodes well for the year.

The eurozone has provided investors with plenty of surprises in the past few years, most of them unpleasant. The economic data released Friday make for a refreshing change.

What Slump? How Eurozone Growth is Bucking the Global Trend

Growth Matters

One of the biggest advantages emerging markets have offered investors is a strong growth story: Over the past decade, growth in emerging markets has outpaced growth in developed markets by more than double. Growth in gross domestic product (GDP) looks like it will continue to outperform that of developed markets for at least the next five years, according to estimates by the International Monetary Fund. 

While it’s true that growth and stock market performance can be divergent at times, there is no question that growth matters since company earnings depend on general economic growth.

Growth Matters

Crystal Ball: Top 10 economic predictions for 2015

  1. U.S. economy will power ahead
  2. Euro zone’s struggle to continue
  3. Japan to emerge from recession
  4. China will keep slowing
  5. EMs: a mixed bag
  6. Commodities slide to extend
  7. Disinflation threat
  8. Fed will be the first to hike rates
  9. Dollar will remain king
  10. Perennial downside risks easing

Crystal Ball: Top 10 economic predictions for 2015.

2015 Global Economic Outlook: Better Than 2014—but Not By Much

Whether you’re the CEO of a multinational or a sole proprietor, it pays to have a sense of where the opportunities lie and the dangers lurk in 2015.

2015 Global Economic Outlook: Better Than 2014—but Not By Much.

The most powerful economic empires of all time

Over the course of human history, certain civilizations developed huge advantages against their rivals. In chronological order, here are the five most dominant economic empires the world has seen so far.

1. The Roman Empire, circa 100 AD: 25 to 30% of global output
2. The Song Dynasty in China, circa 1200 AD: 25% to 30% of global output
3. Mughal Empire in India, circa 1700 AD: 25% of global output
4. The British Empire, circa 1870: 21% of global output
5. The United States of America, circa 1950: 50% of global output

The most powerful economic empires of all time

5 reasons why the market won’t crash

Market bears point to many reasons why stocks should plunge. But the bulls have knocked them down one by one.

  1. No recession in sight
  2. The Fed is still your friend
  3. Sentiment still skittish
  4. Market isn’t cheap but isn’t crazy overvalued either
  5. Corrections have happened in this bull market

5 reasons why the market won’t crash – The Buzz – Investment and Stock Market News.